Underpricing, risk management, hot issue and crowding out effects : evidence from the Australian resources sector initial public offerings

The main purpose of this paper is to explore the role of risk management, speculative industry competition effect and hot issue markets. We used a sample of 260 initial public offerings (IPOs) in the Australian resource sector for the 1994–2004 period to test the underpricing effect. We do not find any evidence that risk management can reduce the uncertainty relating to the new issue and hence alleviate the extent of underpricing. A plausible explanation for this lack of evidence is the poor information content of publicly available disclosures regarding risk management activities of IPO firms. We further provide evidence that the underpricing returns for resources IPOs are not impacted upon by the strength of alternative speculative IPO markets. We also show that the degree of underpricing adjusts to both market return in the preceding three months and the average underpricing of resources IPOs in the 12 month period leading to the float which offers an explanation to the hot issue effect observed in the IPO market.

The underpricing of US REIT IPOs : 1996–2010

This study examines the underpricing cost of 123 US REIT IPOs over the period 1996 until June 2010, including the period of the global financial crisis. The study uses OLS multivariate regression to determine some potential factors behind underpricing. The underpricing cost of raising REIT external equity averaged 3.18% using an equal weighting for each of the 123 REIT IPOs. The study finds offer size is positively related to underpricing. A value weighted approach finds that underpricing averages 4.67% and suggests larger offer size is an important determinant for leaving more money on the table. Higher reputation underwriters, the industry differentiated auditor and post offer ownership structure negatively influence underpricing. The study documents declining underpricing over time with the period of 2007–2010 experiencing negative underpricing (overpricing) during the global financial crisis (GFC). Offers during the hot periods of 1997 and 2004 and the office/industrial property type were more highly underpriced. The 10-year treasury interest rate is identified as another significant positive determinant of underpricing.

Underpricing of infrastructure of IPOs: evidence from India

This paper explores the underpricing of initial public offerings (IPOs) made by infrastructure companies in India from 2004 to 2010, and follows Dimovski who reported that in the Australian market, infrastructure IPOs did not produce underpricing returns that were statistically significantly different to zero. The objective of this paper is to investigate the underpricing of infrastructure IPOs in the emerging market of India and to explore factors that may influence the underpricing of infrastructure IPOs in India. The results show that, on average, the underpricing returns were 25.4% and statistically significantly different to zero, while money left on the table, in aggregate is not. In contrast to Australian evidence, significant underpricing in Indian infrastructure IPOs indicates greater risk of these investments. We find that oversubscription, government ownership and issue size are significant variables in explaining underpricing in Indian infrastructure IPOs.

Investment banks' entry into new IPO markets and IPO underpricing

We examine the relationship between investment banks' initial public offering (IPO) market shares and their prior IPO underpricing in the new IPO market for China-based companies on the Hong Kong Stock Exchange. To gain expertise in Chinese business practices, investment banks have the incentive to obtain business in this new IPO market by providing high offer prices to the issuer, leading to less underpricing and less money on the table. We hypothesize and find that the less an investment bank underprices Chinabased company IPOs, the greater its subsequent market share of China-based company IPOs in the Hong Kong Stock Exchange. Furthermore, this relationship is driven by a bank's initial China-based company IPO deals. These results suggest that in new IPO markets, investment banks' initial market shares, obtained through lower underpricing, help them grow their market shares in later periods, possibly through the expertise gained in the initial business.

The underpricing of infrastructure IPOs: Evidence from China

This study investigates the underpricing of 135 infrastructure IPOs in China from 1996 to 2012. It follows infrastructure IPO studies in Australia and India which report average underpricing returns to subscribers of 3.5% and 25.4%, respectively. The average underpricing return for Chinese infrastructure IPOs is substantially higher at 86.3%, but interestingly substantially lower than the underpricing of Chinese IPOs generally. The issue size, government ownership and the pre-IPO earnings per share are helpful in explaining the underpricing of Chinese infrastructure IPOs while the underwriter reputation does not appear to have much explanatory power. In addition, we find the underpricing of infrastructure IPOs in China is also affected by its local GDP levels.

Underpricing of equity offerings in Brazil

We examine the underpricing of twenty-seven IPOs and twenty-nine SEOs issued in Brazil from January 1999 to March 2006. Determinants on pre-market demand, underwriting activities and information asymmetry were discussed. Common characteristics seem to exist between all issues. 94% have been on premium market corporate level and 93% were realized via bookbuilding. Underpricing for IPOs and SEOs has been recorded at 9.6% and 3.6%, respectively. IPOs are more underpriced when (i) more informed investors receive shares, (ii)better ranked underwriters lead the offer, and (iii) there is positive revision in the final price compared to the initial price range defined before information disclosure. SEOs are more underpriced when (i) shares presents higher appreciation in pre-offer period, and (ii) the proportion of primary offers are larger, supporting adverse selection costs theory.

Análise da influência do private equity e venture capital no underpricing dos ipos das empresas brasileiras no período de 2004 a 2007

Este trabalho objetivou verificar se há evidências de que a presença de private equity e venture capital (PE/VC) nas empresas brasileiras contribui para reduzir o underpricing de suas ações durante a oferta pública inicial (IPO). Foram examinadas 98 ofertas públicas iniciais de empresas brasileiras realizadas entre 2004 e 2007, e aplicaram-se testes de diferença entre os subgrupos e modelos de regressão para se testar as hipóteses do estudo, conforme metodologia proposta por Meggison e Weiss (1991). Os resultados dos testes indicam que não há evidências estatisticamente significantes de que a presença de PE/VC influencia o underpricing nas ofertas públicas inicias das ações. Adicionalmente, há evidências de correlação positiva entre as variáveis independentes, "volume capturado na oferta" e "idade da empresa emissora", e a variável de interesse, "underpricing".

Underpricing y subvaluación en las OPI de Perú y Chile

El fenómeno del underpricing en la oferta pública inicial (OPI) se viene estudiando hace ya varias décadas, y se refiere al retorno positivo del primer día de la acción, calculado como la diferencia entre el precio de cierre del primer día de cotización y el precio de emisión pactado entre el emisor y el banco de inversión. Por otro lado, también existe el overpricing, es decir, al fenómeno que sucede cuando el precio de cierre del primer día de negociaciones es menor que el precio de oferta. En nuestro estudio, encontramos evidencia de ambos, con el underpricing presente en 71,67% de empresas de la muestra y el overpricing tan solo presente en el 28,33% de la muestra. Asimismo, se determinará si existe subvaluación o sobrevaluación realizando un análisis entre el precio de oferta y el valor fundamental calculado a través de una valorización por múltiplos. Esta comparación permitirá comparar un valor fundamental (calculado por nosotros) y el precio de la OPI calculado por la empresa que realiza la cobertura, dejando de lado el precio que el mercado le otorga a la acción en su primer día (precio que puede tener mucho ruido y depender de diversos factores como el sentimiento del mercado y el comportamiento de los inversionistas). Al observar la diferencia entre el valor y el precio de la OPI, podremos determinar si existe o no sobrevaluación. En nuestro estudio, sí hemos encontrado presencia de sobrevaluación del precio de las OPI, alrededor de un 110% por encima del valor fundamental. Si bien la mayoría de investigaciones que se han realizado sobre estos temas han sido sobre empresas en mercados desarrollados, nuestra investigación se centra en empresas de Perú y Chile, que son economías en desarrollo y, además, presentan sectores bastante semejantes en su economía. La muestra consiste en 60 OPI de empresas de Perú y Chile para el periodo 2003 – 2014. Las diversas empresas se han agrupado en los siguientes sectores: servicios públicos, que incluyen eléctricas, agua y control ambiental; materiales básicos, que incluye mineras, químicas y de papel; financiero, que incluye servicios financieros diversificados, bancos, bienes raíces y fondos de inversión; consumo no cíclico, que incluye alimentos, bebidas, farmacéuticas, agricultura, servicios comerciales y de salud; consumo cíclico, que incluye retail, ropa, aerolíneas, entretenimiento y alojamiento; energía, que incluye petróleo y gas; industrial, que incluye materiales de construcción, transporte, construcción y hardware, diversificadas (holdings) y tecnología.

Differences in underpricing of A-REIT IPOs and Australian property company IPOs

Purpose – A variety of papers have analyzed the underpricing of REIT IPOs or property company IPOs. The purpose of this paper is to compare the two sectors and examines differences in the underpricing of the two types of IPOs. Design/methodology/approach – An OLS regression is used to identify factors influencing the underpricing of A-REIT and property company IPOs from 1994 until 2014. Findings – This study finds that A-REIT IPOs have a significantly lower underpricing on average than Australian property company IPOs. The time taken to list appears to influence the underpricing of both A-REIT IPOs and property company IPOs, in that issues that are filled more quickly have higher underpricing but with the magnitude of the impact being less for A-REITs. The sentiment toward the stock market also appears to impact on the underpricing of A-REIT and property company IPOs again with the magnitude of the impact being less for A-REITs. Practical implications – The paper provides information to new A-REIT and property company issuers, underwriters and investors. Originality/value – The study is the first to compare and examine the differences in the underpricing of both REITs and property companies in the one country over the same time period.

Underpricing of privatised IPOs: the Australian experience

We investigate the price performance of initial public offerings (IPOs) of formerly state-owned companies in Australia. On average, privatised IPOs in Australia are underpriced by about 11%, which is not significantly different from the magnitude of underpricing of the privately-owned IPOs and that of privatised share offerings in other OECD countries. While it appears that the magnitude of underpricing is correlated with the size of issues and the party affiliation of the presiding government, cross-sectional analysis of our sample does not support some traditional theoretical explanations of underpricing for privatised IPOs—only the market sentiment prior to the listing is identified as a significant factor in determining the degree of underpricing. We also investigate the impact of a two-tiered pricing structure on the performance of IPOs.

Incentives to underprice

an initial public offering, the choices made by issuers, such as the offer price, might not appear to be wealth maximizing. In this article, we argue that the choices are strategic. Based on the model developed by Barry (1989), we show that the average change in the issuer's wealth (4.52 per cent) is lower than the average loss implied by underpricing (12.09 per cent). Our results support the notion that the choices issuers make at the offering generate a compensatory benefit in the aftermarket. That the issuer may well not suffer a net wealth loss from the offering is in accordance with continued initial public offering activity.